Over the past years, the UAE has witnessed an exponential growth in the development of real estate projects,and it is known for its flamboyant infrastructure.The master developers are creating new communities having residential, commercial and leisure establishments. In addition, plot of land is also sold to other builders for similar development purpose. This brings us to an important question on taxability of Gross Floor Area (‘GFA’).
Prior to development of any community, the master developer is required to get an approval from the Dubai Authority. The developer is required submit a plan of the project bifurcated into plots having number, land usage, area, GFA, number of buildings, number of dwelling units and maximum building height. Basis the development, GFA is allotted to each plot as well as overall GFA for the project is assigned. Basis such approval, guidelines for the overall support infrastructure i.e. number of parks, open area, roads, etc. is also assigned for each project.
The master developers sell individual plots along with the permitted GFA i.e.the permissible construction limit on the plot. Interestingly, the value of land is typically determined based on permissible GFA on the plot. These details form part of the Sales & Purchase Agreement (‘SPA’) which is registered with the Lands Department.
In many instances, the buyer (post execution of the SPA) approaches the developer requesting for allotment of additional GFA.The additional GFA is for a consideration. For e.g.as per the SPA, the permissible limit was to construct 15 floors accommodating X number of people and now the owner wishes to construct 20 floors accommodation Y number of people. The arbitrage for GFA is requested by the owner from the developer.
In such cases, the master developers approach the respective authority for modification on the Master Plan approved. Based on the revised permitted GFA, the master developer allots additional GFA to the buyer basis which construction is started by the owner.
There may be multiple reasons for a request of additional GFA such as change in construction plan, etc. In many cases, the plot would have been resold and additional GFA is being requested by the new owner. This brings us to possible taxability of the additional consideration received by the Master Developer in lieu of additional GFA sold:
At the time of execution of SPA, certain conditions such as terms of payment, plot details and GFA would have been mentioned in the contract which is also registered with the Dubai Lands Department (‘DLD’). A view may be adopted that allotment of additional SPA is by way of amending the original SPA. Therefore, any additional consideration should take color of the original supply which was sale of bare land. Thus the additional consideration received should also be VAT exempt. However, this is not a straight-forward simple solution as it may trigger the following issues:
Alternatively, allotment of additional GFA may be considered as a new supply altogether and not be linked with the sale of original plot of land. This is on the basis that the existing transaction was complete on registering the original SPA with the DLD. Any subsequent request is a fresh allotment which is to be considered as a ‘right is being provided/ permission is being granted’ by the Master Developer to the current owner of the plot. The UAE VAT Law considers granting, assignment, cessation or surrender of a right as a supply of services and thereby the additional consideration should be subject to VAT at 5%.
VAT on Real Estate has been the most complex around the world. With complexities increasing, it is imperative for businesses to involve the respective teams to determine the nature of supply and adopt correct taxability.
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